AlexMacDonald

--Analysts expect more demand for Glencore shares due to FTSE, MSCI index reweightings

(adds details of Glencore CEO and First Reserve share purchases and it's effect on Glencore free float in the 13th and 17th paragraphs)

LONDON (MarketWatch) -- Commodities titan Glencore International PLC (GLEN.LN, 0805.LN) will move a step closer to securing more financial flexibility to pursue larger deals after certain lockup clauses related to its initial public offering expire Thursday and the company can issue new shares for the first time since its listing.

The Baar, Switzerland producer and trader of commodities listed its shares to much fanfare in May, a move that was partly aimed at diversifying the company's financing sources so it could gain more financial flexibility to pursue larger deals in the resources sector.

Since its IPO, the FTSE-100 company demonstrated a healthy appetite for acquisitions. It announced plans to take control of South African coal miner Optimum Coal Holdings Ltd. (OPT.JO), it bought the remaining shares it didn't already own in Australian nickel producer Minara Resources Ltd. for $265 million and expects to close a $475 million stake purchase of a Peruvian copper mine by the end of December.

Glencore has largely relied on cash to pay for its acquisitions, but Thursday's expiry of Glencore's lockup on issuing new shares will give the company more currency with which to pursue transactions.

Analysts have often said they could see value in a share-based transaction between Glencore with Xstrata PLC (XTA.LN), a globally diversified miner in which Glencore already owns a 34.5% stake and has commercial ties.

Glencore's Chief Executive Ivan Glasenberg has made no secret that he sees merit in such a tieup and has said that the current drop in share prices across the mining sector has made company valuations more attractive.

Xstrata's shares have fallen 36% since Glencore's IPO and at one point in October were underperforming Glencore's shares by as much as 20 percentage points--although the gap has closed somewhat--and resulted in a GBP26 billion market capitalization for both companies. Xstrata shares have underperformed Glencore partly because it costs more to short Glencore than Xstrata, given Glencore's limited free float, analysts said.

The wide valuation gap between the two companies last month prompted analysts to revisit the merits of a tieup.

"Our analysis indicates that a Glencore acquisition of Xstrata would be a 'win/win,'" Jefferies analysts said in October. "Glencore could...offer Xstrata shareholders a premium high enough for them [Xstrata shareholders] to accept but not so high as to destroy value for Glencore shareholders."

Nevertheless, current volatility in the equity markets means a deal is unlikely any time soon, analysts say.

"I would be very surprised if they do something before Christmas or [even] next year," said mining analyst Charles Cooper at Oriel Securities. He noted that a bid for Eurasian Natural Resources PLC (ENRC.LN), with its focus in Kazakhstan, was more plausible in the near term. The U.K.'s takeover panel is due to lift a restriction on Glencore's right to bid for ENRC in mid-December, after having imposed the ban in June following Glencore's confirmation that it wasn't actively considering a bid for the miner, although it talks to lots of people in the sector.

Starting Thursday, the six-month lockup period on cornerstone investors will also end, meaning key IPO investors, representing about 5.1% of the company's total share capital, may sell their shares without restrictions.

Glencore may also get a technical boost from incremental rises in the company's free float over coming months, several analysts said. The lockup expiry will instantly raise Glencore's free float from 11.7% to 16.9% and to the 20% band under the FTSE and MSCI indexes. The actual freefloat, however, is likely to be a little bit lower than the 16.9% and closer to 15% once Glasenberg and private equity group First Reserve's recent share purchases are taken into account. Glasenberg and First Reserve's purchases are exempted from the free float because of their links to the firm. William Macaulay, the CEO of First Reserve, is also a Glencore board member.

Investment funds that track the FTSE and MSCI indexes will likely buy more Glencore shares to reflect Glencore's greater weighting in the indexes.

Analysts expect the FTSE to increase Glencore's index weighting on Dec. 16 following its Dec. 7 quarterly review, while MSCI is expected to recalibrate Glencore's index weighting sometime closer to the end of February.

Credit Suisse estimates that the initial free-float increase could result in additional demand for Glencore to the tune of 83 million shares, but it noted that the "bigger indexing event will occur next year when expiry of staff lockups will take Glencore's free float to over 50%."

Glencore's free float is forecast to rise to 53% on May 24 when a series of lock-ups on employees' shares expire, although the actual free float will be closer to 50% once Glasenberg and First Reserve's recent share purchases are taken into account. This will once again boost MSCI's Glencore weighting to 55% and the FTSE's weighting to 75%. The FTSE weighting is higher than either MSCI's forecast weighting or the actual free float because FTSE increases its free-float band in larger increments than MSCI once a company reaches the 50% threshold.

"We see potential for a significant squeezing as index tracker funds look to buy up Glencore shares," Liberum Capital said in a note. It added that buying shares as a result of a squeeze is rarely a good idea on its own, but combined with other underappreciated fundamentals, it would make a powerful combination. Analysts said Glencore's shares should rebound along with the rest of the mining sector, since the long-term demand for commodities is seen as robust and the companies are still performing well financially.

To be sure, Glencore's cornerstone investors--led by Abu Dhabi's sovereign wealth fund Aabar Investments and BlackRock (BLK) -- aren't expected to sell anytime soon, as they paid a combined $3.1 billion for their stake in Glencore and have seen nearly $1.8 billion of that vanish since the IPO. Glencore's shares have fallen 28% since the IPO's offer price of 530 pence a share.

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